Health care reform impacting Tourism, Hospitality, and Leisure at a glance Contents 2 Your five basic questions, answered. 1 1. Why is health care reform a big deal to THL companies specifically? 2 2. What does employer health care in THL companies look like today? 3 3. How will employer health care change through 2015? 4 4. Which provisions of reform will have the greatest impact, and when do they take effect? 5 5. How can you prepare for health care reform? 7 More questions? Just ask. 8 Your five basic questions, answered. Are you ready to step up to health care reform with redesigned benefits plans? The tourism, hospitality, and leisure (THL) industry — with labor costs comprising 45% of operating costs and 33% of revenues1 — is particularly challenged to imagine new business models that will accommodate health care reform without breaking the bank. The Patient Protection and Affordable Care Act (PPACA) represents a substantial shift in the way health care and health insurance will work in the United States. Given the labor-intensive nature of THL businesses, the possible financial risks are real. The costs of compliance — and the fines for noncompliance — could require a THL enterprise to increase prices (a risky strategy in a struggling economy), reduce or restructure staffing models, and/or reduce benefits. Businesses that understand the potential impacts of health care reform may achieve a significant advantage in managing both costs and employee expectations. You need the facts. That is why we are asking — and answering — these five fundamental questions. Health care reform impacting Tourism, Hospitality, and Leisure at a glance 1 1. Why is health care reform a big deal to THL companies specifically? In the past, companies in the THL industry have exercised a lot of latitude in deciding whether to offer health care benefits to employees (and what benefits to offer). Two atypical variables — a relatively large number of part-time employees and particularly high rate of first-year turnover — have typically put a premium on that flexibility. ōIn 2010, the average employee in a THL company worked 24.8 hours per week, whereas the average employee in all private nonfarm industries worked 33.4 hours per week2. ōThe January 2011 average monthly separations rate for THL companies was 5%, which is more than 30% higher than the rate for all private nonfarm industries3. ōIn service industries in 2010, 72% of companies offered health benefits to their employees4. At the same time, THL companies often have diverse and global employee populations. In 2009, the minority labor participation rate in the THL industry was slightly more than 47%, compared to only 34% for all other industries5. All these factors — together — mean that THL companies face unique challenges in complying with health care reform and in communicating any changes in their plans to employees. 2 2. What does employer health care in THL companies look like today? Some hotel and restaurant management companies delegate the decision of whether to offer employee health benefits to individual franchisees. As a result, smaller franchisees (those with relatively fewer employees) have to pay more to offer benefits at employer group rates. In 2010, citing reason for not offering benefits, 54% of THL companies said high costs and 12% said small group size6. Furthermore, only 61% of companies with 5,000 or more employees offered health benefits to part-time workers. More and more organizations, regardless of the size are beginning to offer a variety of health benefits to their employees (Chart 1). Yet, companies are also trying to mitigate rising employer health care costs. In 2010, 34% of companies with more than 1,000 employees offered a high-deductible plan option. Other companies have implemented wellness or disease management programs in hopes to mitigate rising costs7. Chart 1 Among firms offering health benefits, percentage offering a particular wellness program to their employees, by firm size, region, and industry, 2010 Gym membership discounts or on-site exercise facilities Smoking cessasion program Web-based resources for healthy living Wellness newsletter Personal health coaching Firm size 3–24 workers 27% 19%* 49% 42% 8%* 25–199 workers 35 35* 52 46 20* 200–999 workers 59* 57* 78* 59* 40* 1,000–4,999 workers 71* 66* 84* 58* 44* 5,000 or more workers 77* 76* 92* 64* 56* All small firms (3–199 workers) 29%* 23%* 49%* 43%* 11%* All large firms (200 or more workers) 63%* 60%* 80%* 60%* 42%* Industry Agriculture/mining/construction 5%* 8%* 37% 28% 6% Manufacturing 30 34 59 38 20 Transportation/communications/utilities 33 30 73 29 23 Wholesale 38 29 43 47 18 Retail 5* 10* 17* 12* 6 Finance 27 24 49 71* 28 Service 39 24 52 46 10 State/local government 14 12 86* 81* 7 Health care 39 45 70 65 7 30% 24% 51% 44% 12% All firms Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits 2010. Note: Asterisk indicates an estimate is statistically different within type of wellness program from estimate for all other firms not in the indicated size, region, or industry category (p<.05). Health care reform impacting Tourism, Hospitality, and Leisure at a glance 3 3. How will employer health care change through 2015? 90% of chief financial officers (CFOs) participating in a recent Deloitte8 survey said that health care reform will increase the cost per employee of providing health benefits (Chart 2). But even though the CFOs agree that health care reform will likely increase costs, more than 60% of those surveyed intend to continue offering health benefits to employees. In fact, fewer than 4% indicated that their companies plan to drop employee health benefits and pay the mandated penalties (Chart 3). Those planning to continue offering health benefits would probably do well to seek professional advice to ensure both compliance with the new regulations and the identification of innovative ways to minimize benefit costs. For THL companies, health care reform could change decisions about whether to offer health benefits to employees, which employees are eligible for benefits, how to cope with additional health care costs, and how to involve employees in their own health care choices. For example, the legislation requires that by 2014, employers with more than 50 full-time employees provide health benefits or pay penalties equivalent to $2000 per year for each full-time employee (FTE) in excess of 30 employees. This penalty will increase in subsequent years, as the costs of health care increase. Chart 2: Health Reform—Impact on company Level of impact health care reform is expeted to have on companies* Number of people offered benefits Quality or breadth of benefits offered Number of domestic staff Proportion of full-time workers Ability to compete with domestic competitiors for talent Ability to compete with foreign competitors for talent Benefits cost per employee 0% Decline markedly Decline No change 25% Rise 50% 75% 100% Rise markedly Chart 3: Health reform legislation—Company responses Percent of respondents who are considering each alternative* Continue current enrollment levels and work to control health care cost inflation Maintain current scope and level of benefits for employees, early retirees, and actives We have not yet begun to consider our options Limit employer-sponsored coverage to the minimum permissible under the legislation For actives, consider converting to a defined contribution and encouraging enrollment in an exchange For full-time employees, drop employer-sponsored coverage and pay the penalities For early retirees, consider converting to a defined contribution and encouraging entrollment in an exchange This topic does not apply to my company 0 4 10 20 30 40 50 60 70 80 4. Which provisions of reform will have the greatest impact, and when do they take effect? Because of their labor-intensive profiles, THL companies need to pay special attention to those provisions of health care reform related to part-time workers, waiting periods, the grandfathering of self-funded plans, and employer mandates. Additionally, because all employees are diverse and geographically dispersed, communicating health plan changes could be a significant challenge. Part-time employee eligibility for employer health plans—Effective January 1, 2014 In the past, the eligibility of part-time workers depended on criteria specified by the employer. Beginning in 2014, health care reform says that (1) employees working more than 30 hours per week are eligible for employer-sponsored plans and (2) new part-time employees working more than 30 hours must be automatically enrolled in employer plans. THL companies may find themselves forced to expand dramatically the number of employees who receive health care coverage. One solution might be to reduce the number of part-time and temporary workers by converting them into full-time staff or reduce the number of hours their part-time employees work to avoid the 30-hour threshold. Elimination of waiting periods beyond 90 days— Effective January 1, 2014 Industries employing lower-skilled workers often use relatively longer waiting periods for health insurance eligibility as a way to cope with high first-year turnover. Health care reform shortens these waiting periods to a maximum of 90 days for all new employees; for a THL company that could raise costs overall, especially if first-year turnover rates continue to be higher than average. Grandfathering self-funded employer health plans— Plans existing before March 23, 2010 Until now, companies have had considerable freedom to choose what they want to offer in their employer-sponsored health plans. For example, they could decide not to cover experimental drugs, chiropractic services, and a variety of other services and providers. Grandfathering allows companies with self-funded plans to continue offering their existing menu of coverage with a few modifications to comply with new mandates. If grandfathered status is lost, employers may have to include a number of treatment options mandated by the government — options that could increase the costs of the self-funded plans. In another unintended consequence, fully insured plans for senior executives could be affected. Because many health plans for THL companies are selffunded, it is important that management be aware of actions that could result in the premature loss of grandfathered status. Employer mandates for organizations of more than 50 employees—Effective January 1, 2014 Beginning in 2014, companies that employ more than 50 FTEs (full-time defined as 30 hours per week) will be required to provide health benefits for employees or pay penalties. The method of calculating these penalties is somewhat complex, but depends on the total number of employees. A company with more than 50 FTEs that offers no health benefit coverage could be penalized $2,000 per year for every employee above 30 FTEs. Further, even companies offering health benefits could be susceptible to penalties if any employee seeks coverage through state-based insurance exchanges. Employee communication requirements Above and beyond new W-2 reporting requirements taking effect in 2011, health care reform mandates employee communication. In 2012, employers will be required to issue uniform explanations of cost sharing, exceptions, and limits on coverage. In 2013, employers will be required to notify employees of coverage options available through health exchanges in 2014. For THL companies, with their diverse employee populations speaking multiple languages, these new communications requirements could be costly and time consuming. Chart 4 details other relevant aspects of PPACA that will take effect in the next five years. Health care reform impacting Tourism, Hospitality, and Leisure at a glance 5 Chart 4: Plan design provisions Provisions Effective dates Employer implications Elimination of lifetime dollar limits on essential health benefits September 23, 2010 ō Benefit strategy and design decisions ō Compliance process assessment and modifications ō Plan documentation, benefit administrations, and employee communication assessment and modifications ō Fully-insured executive benefit plan assessment and modifications Elimination of health saving account (HSA), flexible spending account (FSA), or health reimbursement account (HRA) reimbursement for over-the-counter drugs January 1, 2011 ō Plan documentation and modifications ō Reimbursement procedure assessment and modificaitions Annual FSA contributions limited to $2,500 January 1, 2013 Elimination of annual dollar limits on essential health benefits January 1, 2014 Extension of coverage to dependent children up to age 26, regardless of dependent marital or student status Elimination of preexisting condition exclusions for children under the age of 19 Restriction of annual dollar limits on essential health benefits Elimination of cost-sharing requirements for certain preventive health services Elimination of coverage rescission abilities Application of nondiscrimination eligibility rules to fully-insured plans Elimination of waiting periods in excess of 90 days Elimination of preexisting condition exclusions for adults “Employer mandate” and potential penalities ō Plan documentation, benefit administration, and employee communication assessment and modifications ō Potential for increased enrollment in employer-sponsored plans ō Potential for increased plan costs ō Potential for financial penalities Automatic enrollment for new full-time employees (30+ hours per week) Employers may offer financial incentives (limited to 30% of the cost of coverage) to wellness program participants Communication, reporting, and filing provisions Provisions Effective dates Employer implications Effective internal and external appeals process September 23, 2010 ō Plan documentation, benefit administration, and employee communication assessment and modifications W-2 reporting January 1, 2011 ō Calculation and disclosure of health benefit aggregate cost for each covered employee Uniform explanations of coverage January 1, 2012 ō Employee communication assessment and modification Employee notification regarding health exchange availability (in 2014) and coverage options January 1, 2013 ō Employee communication and modifications ō Working knowledge of health exchange Annual reporting (for the government and plan participants) January 1, 2014 ō Plan documentation, benefit administration, and regulatory communication assessment and modifications Subsidy, credit, penalty, and tax provisions Provisions Effective dates Employer implications Establishment of a temporary $5 billion reinsurance pool for retirees under age 65 June 23, 2010 ō Potential financial benefit for employers offering medical benefits to early retirees ō Validation, preparation, and assembly of all claims information to be submitted when applying for this program Nonhealth HSA distributions taxed at 20% January 1, 2011 ō Compliance and plan documentation assessment and modifications ō Reimbursements procedure assessment and modifications Medicare Part A tax increased to 2.35% for earnings over $200,000 (individual return) or $250,000 (joint return) January 1, 2013 ō Increase in retiree medical costs January 1, 2014 ō Health plan cost assessment and tax planning Elimination of employer tax deduction for Medicare Part D retiree drug subsidy 40% tax on high-value plans (over $10,000 for individuals or $27,500 for families) 6 5. How can you prepare for health care reform? Considering the many financial implications of health care reform, what is the outlook for large THL employers? Deloitte’s Employer Health care Reform Diagnostic helps answer that question by providing valuable insights to employers on two strategic fronts: plan design modifications and workforce planning. Plan design modifications The financial impact of health care reform depends on your current plan’s provisions and employee cost-sharing philosophy. Using your company’s data, the diagnostic tool provides usable information that exposes potential problems and suggests appropriate mitigation strategies. With the diagnostic results, you can balance the health benefit coverage you want to provide with the new health care reform legislation requirements (Chart 5). you could require new strategies for workforce structure, mix, and talent management. In addition, you should review your company’s underlying health benefit participation rules; a comprehensive workforce planning reevaluation might be required. For example, new rules for waiting periods and new definitions of “full time” status for benefits eligibility might create a new workforce composition; the optimal mix of full-time and part-time workers could change dramatically. Using the Deloitte diagnostic, you can identify potential future costs associated with the new rules and begin to develop organizational strategies that match the new realities under health care reform. Workforce planning Health care policy changes, together with the possible “opening up” of the small-group insurance market, may impact important workforce planning variables, including employee retention, choices about the workforce composition, and incentives given to certain workforce segments. If these impacts affect labor supply and demand, your company could face challenges and higher costs in recruiting, hiring, and retaining the “right” people. Overall, Employer Health care Reform Diagnostic Deloitte’s diagnostic addresses more than 25 separate health care reform provisions that could significantly impact THL employers. Specifically, the diagnostic: ōSummarizes each provision ōDescribes each one’s impact based on analysis of your company’s plan and financial information ōProvides specific financial impact projections based on historical employer data and actuarial and workforce planning assumptions ōProvides preliminary thoughts on cost mitigation Chart 5 Finding the right balance between costs and value Benefit cost Penalties Continue health converge at health levels Continue health converge, but reduce health levels to "safe harbors" Discontinue health converge, but fund HRAs for EEs (defined contribution) Discontinue health converge, but partially gross up salaries Discontinue health converge Typically $8,000–$10,000 PEPY Lower, e.g., $6,000 PEPY Depends on HRA contribution None None None Minimal $2,000 PEPY $2,000 PEPY $2,000 PEPY Payroll cost No change No change No change Increased No change Tax savings Benefit costs fully deductible Benefit costs fully deductible HRA contribution fully deductible Additional salaries deductible by employer None Exposure to future cost increases and fluctuations High High Low Low None Administrative and compliance cost High High Moderate Low None Talent cost impact Lowest–EEs fully "taken care of" Moderate–low Moderate–low High–additional salary is taxed Highest–full burden on EE Health care reform impacting Tourism, Hospitality, and Leisure at a glance 7 More questions? Just ask. The practitioners in Deloitte’s tourism, hospitality, and leisure practice are mobilized around providing solutions to the challenges facing the food service, restaurants, and franchising industry. Our 6,000 consumer products, retail, and services professionals work with clients to develop appropriate strategies and apply new perspectives that maximize profitability and operations for greater efficiency. If you would like to initiate or discuss your health care strategies or plans, we welcome the conversation. For more information Visit us at www.deloitte.com/us/thl Contact Adam Weissenberg Vice Chairman, US Tourism, Hospitality & Leisure Leader Deloitte & Touche LLP Tel: +1 973 602 6789 aweissenberg@deloitte.com Contributing contacts Scott Rosenberger Principal, Tourism, Hospitality & Leisure Consulting Leader Deloitte Consulting LLP Tel: +1 404 942 6535 srosenberger@deloitte.com Alex Kyriakidis Global Managing Partner Tourism, Hospitality & Leisure Deloitte & Touche LLP Tel: +44 20 7007 0865 Alt Tel: +9714 3322 487 akyriakidis@deloitte.co.uk Shaz Khan Principal Deloitte Consulting LLP Tel: +1 313 396 3307 shazkhan@deloitte.com 8 Joe Krolczyk Director Deloitte Consulting LLP Tel: +1 412 338 7618 jkrolczyk@deloitte.com Researchers, writers, and contributors Michael Carnovali, Deloitte Consulting LLP Chandni Chopra, Deloitte Consulting LLP Aaron Gutnick, Deloitte Consulting LLP Grace Huang, Deloitte Services LLP Heather Levy, Deloitte Consulting LLP Dinah Koehler, Deloitte Services LLP Budd Shaffer, Deloitte Consulting LLP Josh Taylor, Deloitte Consulting LLP Naila Stephens, Deloitte Consulting LLP Endnotes 1 Hospitality Trends, “Health Care Legislation – Which Hotels Might Get Sick?” (November 2009) 2 U.S. Bureau of Labor Statistics, “2010 Current Employment Statistics Survey: B-2. Average hours and earnings of production and nonsupervisory employees on private nonfarm payrolls by major industry sector, 1964 to 2010” ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb2.txt 3 U.S. Bureau of Labor Statistics,” Job Openings and Labor Turnover” (January 2011) http://www.bls.gov/news.release/pdf/jolts.pdf 4 The Kaiser Family Foundation & Health Research and Educational Trust, “Employer Health Benefits 2010 Annual Survey, 2011” 5 U.S. Equal Employment Opportunity Commission, “2009 Job Patterns For Minorities And Women In Private Industry,” (2010) http://www1.eeoc.gov/eeoc/statistics/employment/jobpat-eeo1/2009/index.cfm#select_label> 6 U.S. Bureau of Labor Statistics, “2010 Current Employment Statistics Survey: B-2. Average hours and earnings of production and nonsupervisory employees on private nonfarm payrolls by major industry sector, 1964 to 2010 7 The Kaiser Family Foundation & Health Research and Educational Trust, “Employer Health Benefits 2010 Annual Survey, 2011” 8 As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Health care reform impacting Tourism, Hospitality, and Leisure at a glance 9 This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publicaiton is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. Copyright © 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited